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Start-ups, do you Really Need an Employee?

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Can I hire a contractor instead of an employee?

Having the right team on board is essential to the success of any Start-Up.

So when the time comes to grow your team beyond just you and your co-founders, it’s important you already have a solid plan in place for how you hire, manage and retain staff.

Start-ups typically don’t have the budget to compete with their more established counterparts in the war for talent. To make the most of their budget and provide sufficient flexibility, start-ups commonly look for efficiencies in building their team – for example, hiring a contractor instead of an employee.

While start-ups are well within their rights to do this, there are specific employment law factors to consider, and treating a contractor like an employee can get start-ups into trouble.

Hiring a Contractor

As start-up businesses often have inconsistent workloads, contractors can be useful additions to complete work in busier periods with no obligation to continue contracting them when there is no work for them to complete.

Hiring a Contractor can also bring specific expertise into your business that you otherwise would not be able to afford as a permanent employee.

While it may seem that contractors are a perfect alternative to an employee in some circumstances, start-ups can’t have their cake and eat it too. Start-ups who engage contractors on terms consistent with employment risk having the contractor deemed an employee for job-conditions and tax purposes.

What do we mean by engaging contractors like employees? The ATO’s employee/contractor decision tool helps businesses consider whether a worker will be deemed a contractor or an employee under the law.

Obligations for Hiring a Contractor

Some of the factors the ATO considers when determining if a worker should be classified as a contractor or employee are:

The ability to subcontract/delegate: A contractor can pay someone else to do their work for them, an employee cannot.

Basis of payment: A contractor is paid on a specific result based on an initial quote. An employee is paid either for the time worked, a price per item or activity, or via commission. 

Equipment and tools: A contractor provides most or all of the equipment and tools required to complete the work. Employers provide employees with the necessary equipment and tools, or re-imburse the employee if they provide them (for example, an employer providing a fuel allowance if they require the employee to use their personal vehicle to travel as part of their employment).

Commercial risks: A contractor is legally responsible for their work, and liable for the cost of rectifying any defects. An employee is not legally responsible for their work and the business is liable for the cost of rectifying any defects in the employee’s work.

Control over work: Businesses have the right to direct the way in which an employee performs their work. Contractors have freedom in the way they complete their work (subject to any agreed terms in the contract or agreement).

Independence: Employees are considered part of your business, while a contractor is operating their own business, meaning they are free to accept or refuse any additional work.

Hiring a contractor under terms consistent with employment is known as “sham contracting” and is illegal. Hiring a contractor incorrectly can get you and your business penalised by the ATO for avoiding paying employee entitlements.

Complying with regulations is important even if a prospective team member is seeking to work as a contractor, as shown in the case of CFMMEU v Personnel Contracting. In this case, the plaintiff initially agreed to work for Personnel Contracting, a labour hire company, as a self-employed contractor. Despite this, the court held that due to the nature of the plaintiff’s work (they could not exercise the amount of autonomy and control necessary to be considered contractors), they were owed employee entitlements.

Hiring an Intern

Don't hire an intern and expect them to contribute to productivity. They are there to learn.

Start-ups may also consider bringing interns into their business.

Interns are typically unpaid, and enter internships to obtain skills, experience, and professional contacts in the field they are trying to break into.

When many people think of interns, they may think of them being the people that get coffees for the office, among other menial tasks contributing to productivity. Such a misconception may appeal to cash-strapped start-ups, who see an internship as an opportunity to delegate work at no cost.

However, engaging interns to perform this work can imply an employment relationship whereby offending start-ups can incur penalties of up to $54,000 under the fair work act 2009.

What to Consider Before Hiring an Intern

An internship’s primary purpose is for the intern to observe and learn from others in the business, and not to directly contribute to its productivity.

As when hiring a contractor, start-ups looking to take on an intern must ensure the intern is not performing duties of an employee.

Here’s what else to consider when hiring an intern:

The length of the internship:  Prior to commencement, both parties should agree on a set length for the internship. Hiring an intern for an indefinite period is typically frowned upon as it implies an employer/employee relationship.

Payments made to the intern:  You may want to offer your intern a stipend to cover expenses associated with the internship such as travel and lunch. While this is allowed, payments comparable to wages aren’t, as they imply an employer/employee relationship. Such payments include:

  • A regular payment based on time worked.
  • A large lump sum payment.
  • If the stipend mentioned above is significantly higher than the cost of expenses.

Need Advice on Hiring for Your Start-Up?

Whether you’re just starting out and want to plan for future growth, or you’re ready to build your team and are looking for guidance on the best way to do so, our start-up law experts can help.

We work with you to give your start-up a solid legal foundation based on your business’s unique requirements. We do this by understanding your business, your goals and your plans for the future.

To find out more and see how we can help your business grow, contact our start-up lawyers today.

Contact FAL Lawyers for all enquiries